RBI says no zero percent interest scheme for buying consumer goods

Moneylife Digital Team 25 September 2013

In the zero per cent EMI schemes offered on credit card outstanding, the interest element is often camouflaged and passed on to customer in the form of processing fee

The Reserve Bank of India (RBI) on Wednesday banned the zero percent (0%) interest rate scheme for purchase of consumer goods, a move intended to protect customers. However, it may dampen sales and spirits, especially during the festive season.

The central bank has also said no additional charges can be levied on payment through debit cards.

“...in principle, banks should not resort to any practice that would distort the interest rate structure of a product as this vitiates the transparency in pricing mechanism which is very important for the customer to take an informed decision,” RBI said in a notification.

The very concept of zero per cent interest is non-existent and fair practice demands that the processing charge and interest charged should be kept uniform product or segment wise, irrespective of the sourcing channel, such schemes only serve the purpose of alluring and exploiting the vulnerable customers, it added.

In the zero per cent equated monthly installments (EMI) schemes offered on credit card outstanding, the interest element is often camouflaged and passed on to customer in the form of processing fee.

“Similarly, some banks were loading the expenses incurred in sourcing the loan (through commission paid to direct selling agency) in the applicable rate of interest charged on the product,” RBI observed.

The notification further said the only factor that can justify differential rate of interest for the same product, tenor being the same, is the risk rating of the customer, which may not be applicable in case of retail products where the interest is generally kept flat and is indifferent to the customer risk profile.

With regard to subvention, it said, the loan amount sanctioned for the purchase should be after taking into account the discount, rather than giving effect to the benefit by reducing the interest.

Comments

User

RAMU

1 decade ago

The Hindu Editorial of 4th October 2013 titled ‘Taking interest in transparency’ is timely on the belated action of the Reserve Bank of India (RBI). Many consumers have already gone through exploitation by such unscrupulous practices of the banks. Better late than never but the RBI has still a long way to go before ensuring legitimate consumer protection from many forms of exploitation by banks, especially terms and conditions, which are often unilateral, arbitrary and prejudiced against the consumers’ genuine interest and imposed on them who are unsuspecting and vulnerable. I have been trying to persuade the RBI to examine all terms and conditions of all products and services offered by banks and take steps to ensure banks’ terms and conditions will stand the test of fairness and transparency, but not with any tangible response so far.

S. Ramu

Ramesh Iyer

1 decade ago

Well, seasons shoppers and credit card users know this. After all, no FI will offer 0% EMI and not earn anything for this service. The FIs are shrewd businesses, not charitable institutions. This RBI move will only force them to re-phrase their schemes and perhaps make the charges more transparent / easy to compute.